Despite the U.S. government spending trillions of dollars and the rest of the world spending trillions more, two economists do not think this is enough. They want politicians to spend more at home and abroad to support the economic recovery and cushion the blows from the coronavirus-induced crisis.
We’re Gonna Need a Bigger Boat
IMF chief economist Gita Gopinath wrote an op-ed in The Financial Times, calling for a spike in global government spending to help turn things around. Although she conceded in the beginning that “policymakers around the world have responded forcefully” with $12 trillion in discretionary fiscal support, Gopinath says: “it is time for a global synchronised [sic] fiscal push to lift up prospects for all.”
Paul Krugman, the Keynesian economist who is always ready to give us a good laugh, told CNBC that Washington needs to put forward a “really, really big” stimulus and relief package to keep the U.S. economy afloat.
“We really are still very much in the disaster relief stage. A lot of people are going to be out of work. A lot of businesses are going to be stressed. We need to just make life tolerable for them,” he said.
Krugman explained that the labor market remains 11 million jobs short of its pre-pandemic levels, adding that state and local governments “are in extreme financial distress” and “thousands of businesses … are on the verge of collapse.” And yet, according to Krugman, the panacea is even more government spending.
The U.S. government just posted a $3.1 trillion budget deficit and has approved a couple of multi-trillion-dollar stimulus and relief packages. Washington is on the cusp of giving the nod to another $2.2 trillion spending bill. The national debt has topped $27 trillion, states are indebted by $1.2 trillion, and municipalities are in the hole by $2.12 trillion.
When would the level of spending be sufficient for statists like Gopinath and Krugman?
The U.S. Treasury Department announced that it would moderate government borrowing in the October-to-December quarter of 2020. According to a news release, the Treasury plans to borrow $617 billion in privately-held net marketable debt, which is $599 billion lower than what was announced in August. In the January-to-March quarter of next year, the Treasury plans to borrow $1.127 trillion. Treasury borrowing peaked at a record-high $2.999 trillion in the July-to-September period.
Officials in charge of the public purse will transition government financing to longer-dated maturities over the next two quarters. The Treasury says it will increase auction sizes across all securities, with a focus on longer-dated bonds, including seven-, ten-, and 30-year bonds.
One could summarize all that fancy language in this way: The U.S. government is borrowing hundreds of billions of dollars from credit markets to keep things afloat, kicking the can down the road to achieve its objective.
Out of Ammunition?
The Federal Reserve held its November Federal Open Market Committee (FOMC) policy meeting. Officials agreed to leave interest rates unchanged at 0.25% while maintaining its outrageous, egregious, and preposterous $150-billion-a-month quantitative easing campaign.
But while everyone focuses on the Biden-Trump saga, Fed Chair Jerome Powell reminded everyone – indirectly, of course – how he is the most powerful man in the United States today. Although he insisted that Congress needs to employ every fiscal tool at its disposal to support the economic recovery, Powell conceded that the Fed has not run out of ammunition.
“Is monetary policy out of power or out of ammo? The answer to that would be ‘no,’” Powell told reporters.
What else could the Fed possibly do? The de facto plan has been to print more money whenever possible. Powell added that if economic conditions “deteriorate,” the Fed could extend existing facilities, or launch new ones. Policymakers might agree to change “the composition, duration, size, life cycle” of its vast bond purchases, or they could lower the longer-term interest rates. The Fed might yet pull the trigger on subzero rates.
Whatever the world’s most powerful institution does, next month’s FOMC will be a critical one. The first reason is that 12 of its liquidity facilities, including the Main Street Lending Program and the corporate and municipal bond-buying initiative, expire on December 31. The second is that Powell revealed there would be adjustments to its economic projections. This will be a huge meeting that will matter to everyone, especially the man at the center of Inauguration Day 2021.
Read more from Andrew Moran.